Section 2 - FTSE

Employment in London's financial district will have fallen
by 28,000 in 2008, with a further 34,000 to go in 2009 as a
result of the credit crunch. The slump could take the City
back to levels last seen in 1998.
That is the bad news and there is plenty of it. However,
over-development is nowhere near as excessive as in the
1990s and lest we forget, last time round Canary Wharf and
London Docklands were coming on line, offering huge
amounts of space to rival the City’s dominance. So in 2008
take-up, while clearly down, is still expected to reach 4m
ft², compared with a five-year average of 5m ft² to 6m ft².
What the City needs is alternative financing and in an age
where it has traded on globalisation, appropriately enough
it has turned to the cash-rich emerging nations, with the
Middle East a particular target. Can and will the Gulf
respond positively? “To date, the City market has
performed differently to the West End market, in the style
of Middle Eastern money that it has attracted,” says
Andrew Hawkins, a director in JLL’s City investment team.
“The West End market has been characterised by more
active private wealth management or royal family money,
but has largely been focused on wealth preservation in the
super-prime markets of Mayfair and St James. Examples
include the Saudi Arabian royal family (Lancer Trust)
buying 50 Stratton Street for £130m on a 5% yield.
Similarly, a private Middle Eastern investor acquired 63 St
James’s Street, for £31.12m, again reflecting a yield of
5.00%,”says Hawkins.
This, he says, contrasts with the City, where Middle
Eastern investors have been seeking to move further up the
risk curve. In particular, Hawkins cites an appetite from
‘petro-dollar’investors for development opportunities.
Amid the turmoil the City has scored extraordinary
successes for landmark developments, with a strong Gulf
connection. For example, the State General Reserve Fund
of Oman is one of three investors behind Heron’s
development at Heron Tower on Bishopsgate. Likewise, a
syndicate of Middle Eastern private family houses and
institutional investors is backing Arab Investments'
proposed development at The Pinnacle, also on
Bishopsgate. Finally, the Qatari royal family is the
dominant partner behind Irvine Sellar’s development of
the Shard, on the Southbank.
Peter Damesick, head of UK research, CBRE says that
“Within Europe, the UK, and London in particular,
maintained its absolute attractiveness to Middle Eastern
money in the first half of 2008 compared to 2007. At the
same time Middle Eastern investors have increased in
importance within the property investment market which
is showing substantially lower volumes,” says Peter
Damesick, head of UK research, CBRE.
CBRE Research shows that in the first half of 2008 Middle
Eastern investors spent £1.3bn acquiring UK real estate,
which represented 73% of all Middle Eastern investment in
Europe, with London alone accounting for 60%.The UK and
London’s shares of Middle Eastern investment in Europe in
H1 2008 were double those in 2007. In the City office
F T S E G L O B A L M A R K E T S • J A N U A R Y / F E B R U A R Y 2 0 0 9
market, Middle Eastern investors spent £530m in 2008 to the
end of the third quarter, compared to £524m in the whole of
2007. The Middle Eastern share of total investment in the
City office market by the end of November 2008 was 22%,
compared to 7% through the whole of 2007.
Headline projects
Headline projects have provided another fillip. HSH
Nordbank extended a loan used to purchase the Pinnacle
tower site in the City for another year, as developer Arab
Investments pushes ahead with its speculative
development plans. The German bank funded the £200m
purchase of the site in May last year, from German fund
manager Union Real Estate, for a consortium fronted by
Arab Investments. Arab Investments plans to develop the
Kohn Pedersen Fox-designed scheme in Bishopsgate area
and the 945 ft Pinnacle will be one of London’s tallest
towers. It will have 63 floors and around 1m ft² of office
space. At the start of 2008 privately-owned Sellar Property
Group defied the critics and the credit crunch to secure
funding for their enormous London Bridge Shard concept.
It is a project with which they have become synonymous
and began with the fractious partnership with former
development partners Simon Halabi and CLS Holdings,
which became immersed in lawsuits and an expensive and
long-drawn-out public planning inquiry.
The entire 2m ft² scheme was almost derailed when
Sellar attempted to secure funding just at the moment the
world’s credit markets plunged into crisis. But in January
Sellar clinched backing from a consortium of four Qatari
banks (Qatar National Bank, Q-Invest, Barwa International
and the Qatar Islamic Bank) to bankroll the ambitious
Renzo Piano-designed scheme.Four Qatari banks snapped
up 80% of the Shard's development rights at a very
competitive price of less than £100m. However, to secure
the deal Sellar had to reduce its holding of development
rights from one third to 20%. Government-owned
Transport for London is the key tenant in a 200,000 ft²
office pre-let on an initial £38/ft², rising to £42/ft² on
completion. It accounts for about a third of the initial office
provision. However, Sellar was unable to retain accountant
PricewaterhouseCoopers, the original tenant at Southwark
Towers, which will make way for the Shard, and had to pay
£70m to buy in the long lease.
With huge schemes still getting the green light the City’s
demise it not yet set in stone. Despite conjecture about
whether the current crisis will weaken the City, London sits in
the most opportunistic time zone to serve both the Asia Pacific
and North American markets. Moreover, London is one of the
few global cities whose population is forecast to continue to
grow and has an infrastructure which is thousands of years
old,” stresses JLL’s Hawkins. “Cities are about people and
talent.While talent can be attracted by financial rewards, there
will always be a significant element of the employment
market that is driven by a wider more nebulous concept,
namely quality of life for family, schools and culture, all of
which London has in spades.
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